The Russian-Ukraine conflict has raised fresh discussions on the impact of forex trading on economies, writes JULIANA AJAYI
Foreign exchange trading, which involves the buying and selling of foreign currency, has been traded for centuries. However, a modern exchange of foreign currencies started in the early 1970s with the United States.
In measuring the volume of trade in the capital market, forex is rated as the largest market in the world.
Everyone that has travelled overseas would have been involved in a forex trade upon buying the currency of a particular country. For instance, a trip to the U.S. would require a Nigerian to sell naira to them for dollars.
The difference between an online forex market and that of bureau de change operators is that in online forex you don’t sell physical currency. Buyers and sellers in the forex market can either be a bank, business owners or individual investors.
Trading in currencies is done in pairs, bearing in mind that the goal of making profit could result in the appreciation or depreciation of one currency against the other. Essentially, buying or selling any currency pair is carried out with hopes that the value of the pair will depreciate or appreciate profitably.
The currency pairs traded in the forex market include Euro, US Dollars, Pounds Sterling, Swiss Franc, Japanese Yen and Chinese Yuan.
In pairing currencies, one can choose to buy the euro and sell the dollar. Let’s just say, due to market fluctuations, market value increases for the euro against the dollar, the difference means a profit for your deal.
Trading in the forex market is incomplete without a broker. A forex broker is a financial services company that allows traders access to foreign currencies in the market. This access comes with a trading account, which allows them to earn through spreads.
Spread represents the brokerage services costs.
Explaining the role of a forex broker, the Chief Trading Analyst of Matino Fx, Matthew Okoidegun, said, “When you receive $10,000 from a friend abroad and walk into a bank in Nigeria to exchange it, the bank would tell you that the latest Central Bank of Nigeria rate is N500.
“When you walk into that same bank the following day with an emergency that requires you to travel abroad requesting the same $10,000, the bank would tell you that its rate is N600, meaning you will have to pay N600 for that same amount.
“In this situation, N500 is the Bid price, while N600 is the Ask price. They just made N100 profit per dollar from you within a space of 24 hours.”
In Forex, the Bid and Ask prices are virtually the same. The Bid price is the price buyers are willing to buy, while the Ask price is the price that sellers are willing to sell.
In the illustration given above, the Spread is N600 – N500 = N100, representing the bank’s profit.
The Spread, which is the profit of the brokers, is very small because it is measured in pips.
A pip is the smallest whole unit price move that an exchange rate can make, according to forex market standards.
Impact of Russian-Ukraine conflict on forex
Following the Russian-Ukraine conflict early this year, several countries’ currencies have depreciated. The aftermath of the invasion by Russia had unpleasant effect on countries trading with one or both countries. This has also affected the economic performance of some countries, including Nigeria.
The International Food Policy Research Institute, in its recent report, highlighted the impact of the crisis on Africa, Nigeria in particular. It says, “The current rise in global market prices for major food commodities almost mirrors that of the 2008 food crisis, presenting a worldwide threat to food security.
“The situation is particularly severe in Africa, where the Coronavirus Disease and now the Russia-Ukraine crisis have exposed food systems to major shocks, particularly in countries like Nigeria that rely heavily on imports of major staple foods such as rice and wheat.”
The report also stated that the spike in global food prices, supplies of wheat, oils and other items caused by the crisis places Nigeria, which is already dealing with failing food security, in an bad spot. This is dependent on the fact that over 50 per cent of the foods consumed by Nigerian households are purchased.
Since forex is the buying and selling of currencies, when a country purchases products from a foreign country, it pays with foreign currency. A large percentage of transactions conducted globally are carried out using the US dollar. In Nigeria, for example, over $2.15bn was expended on wheat imports in 2020.
Some countries, including Angola and Venezuela, are enjoying increase in exports and rising oil prices following the Russia-Ukraine war. However, some countries’ currencies are reported to be losing value against the dollar, including Moroccan dirham, Icelandic krona, Zimbabwean dollar, Ghanaian cedi, Sri Lankan rupee , Russian ruble and Lebanese pound.
Impact of foreign currency on economy
According to a 2018 economic research, forex trading affects an economy in the short and long term, This is so because economic activities determine the demand for a particular currency, which, in turn, affects the value of the currency. When a currency has constant demand due to increased income from tourism and/or manufactured goods, then the economy is bound to grow.
Bestonlineforexbroker.com reports that international trade has a great influence on forex rates. The demand for a particular currency in the forex market determines the benefits a particular nation gets from forex trading.
“When two nations trade, they must agree on a particular currency exchange. The currency chosen for exchange attracts an increase in demand and thus translates to increase in revenue for the traders involved in its exchange.
“The currency chosen for exchange attracts an increase in demand and thus translates to an increase in revenue for the traders involved in its exchange. Strong nations, whose currencies are high in demand, get a lot of revenue from the forex market,” it states.
Further research shows that a weaker currency can lead to imports becoming more expensive. A nation’s trade deficit or surplus can also be highly influenced by a weak or strong currency.
In forex, there are three types of traders namely, non-commercial, commercial and retail traders. The non-commercial traders are said to form the basis for sentiments. They control the market trend for forex traders to interpret on their charts. The major objective in the forex market is to make profits. Examples of non-commercial traders are hedge funds, commercial banks, insurance and investment firms.
Commercial traders, known as fundamentals, are considered the biggest in the forex market. They stabilise the economy and attract investors. This group comprises central banks, as well as governments and corporations of several countries.
Retail traders use more techniques, such as candle sticks and so on. The retail traders are the least on the ladder; more of an infant in the forex market.
The forex market consists of two forms of trading; technical and fundamental analyses. The fundamental analysis is regarded as news trading. In fundamental analysis, the forex market is analysed according to the news.
Technical analysis, on the other hand, is the most popular form of trading. According to Okoidegun, technical analysis is more popular.
He explained, “Since high volatile news is not released everyday, you cannot just depend on fundamental analysis alone. As a forex trader, you must learn the market using technical analysis.
“Trading in the financial market is difficult and risky. There are no shortcuts other than mentorship and experience. This is why we encourage you to grow your knowledge first before investing.”
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